When financial instruments, such as those listed in Table 1, are traded, the credit worthiness of the opposing counterparty is important because obligations of one or both parties under such financial instruments may extend up to and beyond thirty years. Each of the parties may be exposed to risk based upon the ability of a counterparty to fulfill its obligations. The resulting credit exposure over the life of a contract is potentially an unknown amount. Therefore, trading parties have a significant interest in limiting credit exposure.
One method by which credit risk may be mitigated is by including early termination provisions in the terms of the trade. For example, when entering into a contract to trade a 10-year swap, both parties may agree to give the counterparty an option after 5 years to terminate (i.e. “unwind”) the contract at “fair value,” calculated at the time the option is exercised. This gives each party the opportunity to evaluate the counterparty's credit worthiness at the future date. These terms are typically called “mutual puts,” “early termination clauses” or “break clauses”. The mutual put terms typically include two time parameters specifying when the parties may exercise the option: the initial time at which either party may exercise the option (the “first look” or “start date”), and the times, if any, at which such options may be exercised thereafter (the “period”). For example, a five year period may be exercised every five years after the first look dates for the life of the instrument, and a one year period may be exercised every year after the first look date for the life of the instrument. The parties may also specify other parameters, such as the last time the parties may exercise the option (the “last look”). The parties also agree, at the time the contract is entered into, as to the methods for settlement and calculating fair value, such as those methods set forth in the International Swaps and Derivatives Association (“ISDA”), 2000 ISDA Definitions. 
A number of systems have been developed which attempt to automate the trading process and provide credit controls. For example, U.S. Pat. No. 6,014,627 describes an anonymous trading system which identifies the best bids and offers from those counterparties with which each party is eligible to trade. The system pre-screens each bid and offer for a particular type of financial instrument for compatibility with credit information to calculate a best price (the “dealable” price), for each entity dealing with the particular financial instrument.
U.S. Pat. No. 5,924,083 describes a distributed trading system for displaying a credit-filtered view of markets for financial instruments based upon credit limits entered by the trading parties. Each trading entity initially enters credit information which consists of the amount of credit that the trading entity is willing to extend to other trading entities for one or more types of trading instruments. Each trading entity may also create group credit limits by which the trading entity may limit the amount of credit it is willing to extend to a group of potential counterparties.
TABLE 1F/X ProductsAmerican and European OptionsCallsPutsRisk Reversals and StraddlesStranglesExotic OptionsKnock-ins/outsReverse knock ins/outsOther InstrumentsForwardsFixed Income ProductsSwapsSwap spreads (traded with treasury hedge)All-in rate swapsSpread switchesAll-in-rate switches1-3, 3-6, 1-6 month LIBOR basis swapsCP-3 month LIBOR basis swapsForward Rate Agreements1/3/6 month LIBORFRA SwitchesSwaptionsEuropean (payer, receiver, straddle)Bermudan (payer, receiver, straddle)Bermudan-European Switches (payer, receiver, straddle)Caps/FloorsLIBOR Cap/Floor, StraddleLIBOR Digital Cap/FloorConvexity ProductsCap/Floor, Straddle (CMS/CMT 2, 5, 10, 30 year tenors)Rolling Spread Locks against a spot hedgeRolling Spread Locks quoted outrightEquity Index ProductsAmerican and European OptionsCallsPutsStraddles
PCT Application, No. PCT/US98121518 describes a credit preference method in an anonymous trading system for screening trades between entities. Three screening methods are described: a binary method in which each entity makes a yes or no determination as to whether or not it will deal with each potential counterparty; a line binary or time limit method in which each entity sets a maximum maturity of contracts for each potential counterparty; and a “complex” method in which each entity specifies a maximum amount it will trade with each counterparty for one or more “maturity bands.” The system provides a “complex preference interface” through which a credit administrator for the trading entity can specify for each potential counterparty, the maximum exposure for each maturity band. For example, an entity could specify that for a given counterparty, it “will do up to $100 million out for 5 years, and then only $50 million out from thereafter out to 10 years, and nothing thereafter.” In determining appropriate limits, the administrator use a measure of “risk equivalence” (RQ) which is calculated as a function of the potential exposure averaged over a series of time points, weighed by a discount factor.
In a typical “conversational” trading desk scenario in which traders enter and act on orders over the telephone, the traders may verbally negotiate for whether mutual puts will be required, and if so, the terms for such mutual puts (e.g. first look and period). At least one known automated trading system allows traders to enter into “free form” electronic messaging in which the traders may negotiate for mutual puts and relevant terms (e.g. first look and period). The traders are then required to report the mutual put parameters to trading system administrators who generate the appropriate confirmation forms. However, no known electronic or conversational system allows a credit administrator or other authorized user to set enforceable limits for mutual put requirements. Thus, there exists a need for a method and system of facilitating the enforcement of mutual put requirements for use with electronic trading systems.